HK may see some capital outflow when US lifts rates: HKMA chief

Hong Kong could see some capital outflow as the United States Federal Reserve prepares to raise interest rates, the head of Hong Kong Monetary Authority (HKMA) said on Wednesday.

The US central bank is expected to resume a rate-hike cycle by the end of this year, which will lead to some churn in capital flows, Norman Chan Tak-lam (陳德霖) said.

It is hard to predict the extent of the potential capital outflow from Hong Kong, but the situation will be manageable, he said, pointing out that the US monetary tightening will be a gradual process.

HKMA will keep a close watch on market developments and impose measures, if necessary, to ensure stability in the banking and financial system, Chan added, according to the Hong Kong Economic Journal.

Easy money policies in the US and some other regions have flooded global financial markets with cheap cash in recent years, benefiting asset prices in places such as Hong Kong.

Meanwhile, renminbi unwinding activities in the past few months — triggered by a slide in the Chinese currency — have put upward pressure on the Hong Kong currency.

As the Hong Kong dollar repeatedly tested the stronger side of its allowed trading band, the HKMA had to inject over HK$47.1 billion so far this month into the banking system to defend the local currency’s peg to the US dollar.

The trend in interest rate forwards over the last two weeks has shown that investors are expecting a rate hike in the US as early as September.

The Fed will conclude a two-day monetary policy meeting on Thursday and make an announcement. Some observers say the Fed could announce a rate hike, while others say it will hold its fire for now and that the tightening will begin later in the year.

A quarter percentage point hike in the Fed funds rate is expected when the tightening begins, but Hong Kong may not follow suit in the short term given an aggregate balance of over HK$300 billion in the banking system.

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